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Friday, August 26, 2005

Greenspan: housing boom an economic imbalance that could end badly

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

The foreigners and hedge funds have been buying up lots of bundled mortgages. They have accepted low compensation ( low interest rates) for their risk. This will not last. Once the incredible amount of cheap financing comes to a close the local housing bubbles will collapse. Watch out.

If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment

Don't blame me I have been flexible. We still can correct America's imbalances ( housing boom and trade deficit) without a recession.

In fact, the performance of the U.S. economy in recent years, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence that we have benefited from an enhanced resilience and flexibility.

5 comments:

Seems like Greenspan is giving fair warning that the chance exists for an economic disaster.Perhaps it is far too late to avoid this, however from all the signs I am seeing, there is a very good chance for a fairly severe recession next year-

I think Greenspan gave fair warning that the housing bubble has put the economy on a very shaky foundation- and the possibility exists for a potential bad ending- I am not a big fan of AG- but I do admire him for giving us all fair warning that there could be rough weather ahead.

Its always disgusting when someone like Greenspan makes comments on the fragile, shaky nature of the economy from Jackson Hole which is in Teton County. Despite its relatively small population, is the wealthiest county in the nation.